Saturday, January 31, 2009

Round-up of "Stimulus" Analysis

A 40-year Wish List Wall Street Journal editorial 1-28-09

"The European Social Welfare State Bill" by Jim Manzi at National Review 1-27-09

"Japan Seeks New Ways to Boost Economy" by John Murphy WSJ 1-14-09 (How similar measures failed to "stimulate" the Japanese economy.)

"What are they buying" by Thomas Sowell 1-29-09

"Can Fiscal Stimulus Revive the US Economy?" by Frank Shostak on Ludwig von Mises Institute, 1-22-09

"How Not to Stimulate the Economy" by Bruce Bartlett Public Interest 1993 (A look at the results of past government stimulus attempts.) and more recently at Forbes, "Does Stimulus Stimulate?"-I disagree with Bartlett's conclusions, but he provides some interesting information and a nice synopsis of the evolution of 20th century U.Ss. monetary and fiscal policy theory.


Friday, January 30, 2009

Von Mises on Economic Education

[W]hat is unsatisfactory with present-day academic conditions — not only in this country but in most foreign nations — is not the fact that many teachers are blindly committed to Veblenian, Marxian, and Keynesian fallacies, and try to convince their students that no tenable objections can be raised against what they call progressive policies; the mischief is rather to be seen in the fact that the statements of these teachers are not challenged by any criticism in the academic sphere. The pseudoliberals monopolize the teaching jobs at many universities. Only men who agree with them are appointed as teachers and instructors of the social sciences, and only textbooks supporting their ideas are used. The essential question is not how to get rid of inept teachers and poor textbooks. It is how to give the students an opportunity to hear something about the ideas of economists rejecting the tenets of the interventionists, inflationists, socialists, and communists.

--Ludwig von Mises, From Planning for Freedom. Originally published in The Freeman, April 7, 1952.


Will's Wisdom

"If we took Congress seriously, we would be worrying all the time."
-- Will Rogers
(1879-1935) American humorist

HT Liberty Quotes

Thursday, January 29, 2009

Where government steps in, private action steps out.

$13.4 billion auto rescue with TARP funds"
The Big 3 Auto companies can't sell enough cars to make a profit. People are unwilling to voluntarily give them their money in exchange for their cars. The government has decided to give them our money anyway.

“Doubling the production of alternative energy in the next three years.”-ARRP
Venture capitalists have not funded alternative energy research or production sufficiently to satisfy the environmentalists and politicians. Private investors did not judge it profitable (benefit exceeds the cost) to risk their own dollars on these projects. Since no one would risk their own money voluntarily, the government will risk our money instead.

“Making the immediate investments necessary to ensure that within five years, all of America’s medical records are computerized.” -ARRP
Doctors and clinics have not converted all of their medical records to computerized form. In their individual judgment, this was not the best use of their limited resources and time. The government is planning to spend our money to have it done anyway.

“Investing in the science, research, and technology that will lead to new medical breakthroughs, new discoveries, and entire new industries.”-ARRP
If these investments are truly profitable and the best use of scarce resources, they will be funded voluntarily. Private industry and entrepreneurs are constantly looking for ways to innovate and increase efficiency while at teh same time being held to the standard of market discipline: if people are unwilling to pay for your product, you go out of business. Government "investment" by-passes the market and uses coercion to do what people will not do by their own free will.

When government steps in, private industry steps out.

This includes bank bailouts, broadband access, mass transit and other infrastructure projects, education, art, parks and recreation, charity and health care. Government only needs to "invest" when people do not invest voluntarily. Government spending substitutes the voluntary choices of millions of individuals for the coerced choices of powerful minorities and special interests.

The summary of the American Recovery and Reinvestment Plan (passed yesterday in the House 244-188) states: "There are no earmarks in this package." That's because there doesn't need to be: it is one big pork-barrel, special-interest spending bill which extends funding to every aspect of the expanding welfare state. Wealth is transferred from the productive to the less and even the unproductive; economic exchanges are transformed from the voluntary into the involuntary.

Government is coercion. When used appropriately, it protects and preserves our individual rights. When used to promote, support or fund economic activities, it can only diminish our freedom and our wealth.

With all due respect, Mr. President...

Published 01-28-09 in the New York Times and Washington Post:

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

See the signatures here.

Wednesday, January 28, 2009

Economic Self-Defense

Many prominent American figures claim to be proponents of free markets but in practice advocate neomercantilist, corporate welfare policies. These policies eventually, and unsurprisingly, lead to disastrous economic and social consequences. These catastrophes are then blamed on capitalism, free markets, and deregulation, at which point, socialists are easily able to convince the distraught public that capitalism is a failed experiment and only massive government intervention in the markets can save them. Such is the way that capitalism dies.
-- "The Enemies of Capitalism" 01-27-09

"I've abandoned free-market principles in order to save the free-market system."
---George Bush on CNN

"I'm a market-oriented guy, but not when I'm faced with the prospect of a global meltdown." ---George Bush before the G-20 summit.

Armstrong continues:

When one of the nation's most visible proponents of capitalism claims that he has abandoned it, because, without big-government policies, capitalism itself would be destroyed, there remains little work for those who desire socialism. Thus it is easy to see how those who believe Bush to be a true capitalist could be persuaded to accept the propaganda that the free market has failed, and that government must step in to save the day.

Before we try to untangle the causes of financial crises, or attempt to project the effect of proposed remedies, let's get our definitions straight.

Capitalism: the social system in which individual rights are applied to the realm of trade; a social system based on private ownership of the means of production. (Reisman, pg 19)

Statism: The practice or doctrine of giving a centralized government control over economic planning and policy (

Socialism: an economic system based on government ownership of production (Reisman, pg 264); any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy (

Mercantilism: the theory and system of political economy which espouses the need for government intervention into economic affairs in order to assure a favorable “balance of trade”, i.e. exports greater than imports (, Reisman, 526.)

Mixed Economy: an economy which remains capitalistic in its basic structure, but in which the government stands ready to intervene by bestowing favors on some groups and imposing penalties on others (Reisman pg 34); an economy based on the private ownership of the means of production but more or less severely hampered by an extensive list of socialistically motivated government intervention (Reisman, pg 264.)

The United States is not now, and never has been a capitalist economy. From its inception, the U.S. has been a mixed economy with an ever-increasing amount of government intervention. We are currently implementing a degree of central planning which can only further undermine the benefits and blessings which capitalism has thus far provided: our wealth and our freedom.

Massive amounts (trillions) of spending have recently been approved, with yet even more being proposed. To implement these programs, government must expand even further into our private lives and businesses. (Full nationalization of the banking system is seriously being considered!)

With the slump in stock and housing markets, the subprime mortgage debacle, the domino-failures of banks, the proliferation of comparisons to the Great Depression and the resurgence in the prestige of New-Dealers and Keynesians, it is time to study economics.

On this blog,I attempt to explore and explain the basic tenets of capitalism as they pertain to current events; to tease out the fundamentals and present them in a way that makes sense to the educated layman. The better we understand the laws of economics, the better we can analyze what is happening in the world around us, and speak out effectively in economic self-defense. Let's not let Gresham's Law of money (bad money drives out good) apply to the realm of ideas.

Tuesday, January 27, 2009


From my brother-in-law:


I'm forwarding this email from one of E----'s sisters to you for two reasons. First, it reveals the nuts and bolts of the stimulus package and provides details on what they want to do with our money. Second, I thought it might offer some encouragement that there are others who think this is the wrong solution to the problem. (I know I could use some encouragement about now.)


Hi B.,

I am a friend of E----,(and S is my brother-in-law.) He forwarded your email to me.
May I post your letter on my blog? You can check it out at the link below.
Thanks for putting together the information.



By all means you may put my letter on your blog. I think this may be up for a vote tomorrow. Not sure.

I don't usually send around emails like this, but ever since the first $700 billion bailout last fall, I have been trying to pay closer attention not to just what is in the news, but what is actually in the details. My brother Kevin asked me to send the links to him, and I thought why not send it to a few more people.

Democrat or Republican, we are all taxpayers.

Thanks for your interest, and I will be sure to visit your blog.


The email:

Dear family and friends,

This $825,000,000,000 (billion) bill was introduced in the House of Representatives yesterday (Jan 26) and may be up for a vote in the House this week. That is a boat load of money.

I am not asking you to feel one way or the other about this, but I am asking you as a fellow taxpayer to please be aware of all that is in this bill before it is voted upon. Then, if you are so inclined, please contact your congressman or congresswoman to express your support of or opposition to this bill.

This is the link to the House Appropriations Committee website, (the bill came out of this committee):

This is a link to the most recent summary of the bill. It is just 14 pages long, and was written by the appropriations committee. It is not a summary from an extreme left or right group:

This is the link to the entire bill as it was introduced in the House yesterday (good reading if you are prone to insomnia):

To find out who your representative is, you can go to and just plug in your zip code. You can contact most representatives by phone or email.

I know you are all very busy but, if you can, please take some time to read up on this bill before it is passed. Decide for yourself if it is the "stimulus" and "job creating" bill that it is being portrayed as. I don't think it is.

Thanks for your time,


Say's Law of Markets in Today's World

Check out an excellent article by John Tamny in the 01-12-09 online issue of Forbes.

Saving is Stimulus

The 19th century political economist Jean-Baptiste Say observed that excessive consumption is the equivalent of capital destruction, because the amount of capital available to new businesses is being reduced...So while it is certainly true that we produce in order to consume, it is pure myth to suggest that parsimony is an act of economic destruction. More realistically, when individuals spend with abandon they're not only depriving themselves of interest and future financial security, they're also depriving industry of the capital necessary to grow...

In truth, if we must have the economic retardant that is stimulus foisted on the economy, the single best thing its recipients could do would be to put the money in the bank. At least then money borrowed from the private sector by the government for immediate consumption would potentially be made available to businesses eager to grow.

So despite the conventional wisdom telling us that we must spend irrationally in order to boost the economy, the simple fact remains that individuals can only grow wealthy if they save first. And when people work to enhance their personal financial situations, they're also providing real stimulus to the economy thanks to existing and future businesses having access to capital.

And he has another one here. "Government solutions Are Slowing the Economy"

Keynes knew what he was doing (at least here)

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

-- John Maynard Keynes
(1883-1946) British economist
Source: "The Economic Consequences Of The Peace"

HT Liberty Quotes

Monday, January 26, 2009

Sunday, January 25, 2009

When was the money easy?

Was there or wasn't there a period of "easy money" and monetary inflation fueling the boom and creating the set up for the bust?

You can choose which ever money supply measure you like, they all went up tremendously:

(I am working on a post which explains the various money supply measures. In a world of fiat money and fiduciary media, it's hard to know just what to count.)

We didn't have rampant increase in prices over the past 2 decades because in spite of the increase in money supply, we also had a tremendous increase in productivity. Without the increase in money supply, prices would have fallen even more than they did.

Carpe Diem has a great series comparing the 'cost" of several common items in terms of length of time the average worker would have to work to earn enough to purchase it. If you think about it, it should come as no surprise that we can purchase much more with our labor today than we could in 1980.

scientific calculators 12.5 hours i 1981; 33 minutes today
19-inch portable TV 71.3 hours in 1981; 9.3 hours today
microwaves 63.2 hours in 1981; 6.5 hours today
DVD player 187.3 hours in 1981; 3.8 hours today

Why? Increased productivity--which results from resources being used more efficiently, perhaps through innovation in business practices, or through new technology, or economies of scale.

So while the dot-coms early in this decade and housing prices more recently rose in distorted-investment bubble form, the bulk of the economy was busy increasing its productivity. Digital cameras and HD TV. iPods and iPhones and all the permutations of cell phones/PDAs. Graphing calculators. Hand-held GPS devices. Netflix. eBooks. What other "miracles" of our economy can you think of?

This page has a list of the cost of other items in terms of time worked to purchase. (The rest of the page has some facts and analysis worth reading on a few other commonly held economic myths.)

Friday, January 23, 2009

How can we afford to spend even more?

I.O.U.S.A. --- A 30 minute clip on the US Debt by

I wasn't sure at first if I wanted to embed this clip, but I finally decided that the good parts outweigh the bad. I will give you a summary, and a bit of a critique, and then you can decide if you want to invest the time to watch it. Given the push for more and more spending, I think it is critical to be aware of the facts about the size of our debt

The first few minutes are introductory and meant to be an attention getter, so you won't miss anything of substance if you skip that part. (Just click on and drag the button to the right of the the play/pause button and scroll to the time you want. I've given you the times for the various sections below.) The subject of our debt is introduced with the fact that, as of Feb. 2007, the federal government was in the hole for $8.7 trillion. (That's $8,700, 000, 000, 000--and it doesn't include state or local government debts.) With a GDP at that time of $13.5 trillion, it leaves us with a debt/GDP ratio of 64.4%.

I have found different figures on different sites. The CIA World Fact Book estimates the 2007 GDP to be $13.78 trillion, and lists a 60% debt ratio. The OMB Historical Tables for the Federal Deficit doesn't give a figure for the GDP, but estimates the debt ratio for 2007 as 65.5%, and for 2008 as 66%. However, as you can see from the table, significant pieces of the data are still not available.

Below is a graph of debt as a percent of GDP from 1950 to Sept. 30 2008. The website where this graph is posted uses the OMB figures and makes the claim that Bush's tax cuts and the Iraq war are major contributors to the deficit, a fact which is contradicted at the end of the video clip.

The above figures don't include the "unfunded promises" of Medicare and Social Security which if added in bring the total as of Sept. 2007 up to $53 trillion. (That's $53, 000,000,000,000.)

3:00 minutes: The Debt and the Four Deficits

Here starts the "business" part of the clip. By their analysis, we have four major deficits to be concerned about: budget deficit, savings deficit, trade deficit and leadership deficit. (I disagree that a trade deficit per se is a problem and will explain my objections later.) Next comes my favorite part of the clip: a moving graph of the US Debt throughout the history of this country. A ball rolls up and down a series of peaks and troughs as it travels in time from the American Revolution to today. I find the visual image provides a helpful perspective.

~8:00 minutes: The Budget Deficit

A pie chart shows where the money goes. The largest single slice is Social Security, with the military a close second. Next comes Medicare and then Medicaid. It's important to realize what a huge chunk of the budget these programs take and just how insignificant "earmarks" are in comparison. The second pie chart shows where the money comes from: tax, tax, and more tax...but still short by $410 billion. (That's $410, 000, 000, 000.)

9:45 to 11:00: Graphics of the federal budget deficits for the past 40 years.

12:30 to 13:25: Animated graph showing how expenditures blossom as baby boomers retire.

13:35: The Savings Deficit.

The clip claims that for the last two years, the savings rate has been negative, but the charts I found don't show it to be bad, but not quite that bad. Click to enlarge the charts to see the personal savings rates from 1959-2008 and for a close-up look at 1998-2008.

16:00: A graph of personal savings rate as a percent of disposable income, showing the plummet from 12.5% in 1950 to -2.9% in 2000.

17:00: The Trade Deficit.

Most analysts bemoan the existence of the "trade deficit." Even the name sounds dreadful! In the Mercantilistic days before the existence of capital markets, if a country's imports were greater than its exports, gold drained out of the country. Monarchs viewed this as "unfavorable." They wanted the gold to stay in their country, so they could tax it away from their subjects and wage wars. Today's situation is different. The "trade deficit" gives only one part of the equation. When all the relevant factors are taken into consideration, there is a balance of payments, not a deficit or surplus. And instead of a sign of weakness or vulnerability, imports greater than exports signal a growing, healthy economy. (I will expand this explanation of trade deficits sometime in the next day or two--I hope.)

The part of this section on trade that I am less sure about is the risk of having foreign ownership of the U.S. government debt. I'd love it if someone more knowledgeable could comment on this.

22:00: The Leadership Deficit

This section talks about the importance of balancing the budget but, in my opinion, fails to emphasize adequately the need to cut spending (as opposed to--gag--raising taxes.)

The last 5 minutes make offers some projections that seem questionable, but not enough data is offered to evaluate them. Here the important point is made that pork barrel and special interest spending is less than 1% of the annual federal budget, and that the cost of the Iraq war is less than 3 % than of the what we owe.

Sobering statistics. I wonder what the spending and promises of the past few months will do to these figures. And then there is the spending planned by the new administration... 000, 000, 000, 000, 000, 000, 000, ... ... ...


Thursday, January 22, 2009

James Madson on Public Works

If Congress can employ money indefinitely to the general welfare, and are the sole and supreme judges of the general welfare, they may take the care of religion into their own hands; they may appoint teachers in every State, county and parish and pay them out of their public treasury; they may take into their own hands the education of children, establishing in like manner schools throughout the Union; they may assume the provision of the poor; they may undertake the regulation of all roads other than post-roads; in short, every thing, from the highest object of state legislation down to the most minute object of police, would be thrown under the power of Congress.... Were the power of Congress to be established in the latitude contended for, it would subvert the very foundations, and transmute the very nature of the limited Government established by the people of America.

-- James Madison
(1751-1836), Father of the Constitution for the USA, 4th US President
Source: referring to a bill to subsidize cod fisherman introduced in the first year of the new Congress

(HT Liberty Quotes)

A Meaningful Stimulus?

How many people will have meaningful input in determining the overall allocation of the billion stimulus? 10? 20? It won't be more than 1000. These people--let's say that in the end 500 technocrats will play a meaningful role in writing the bill--will have unimaginable power. Remember that what they are doing is taking our money and deciding for us how to spend it. Presumably, that is because they are wiser at spending our money than we are at spending it ourselves.

The arithmetic is mind-boggling. If 500 people have meaningful input, and the stimulus is almost $800 billion, then on average each person is responsible for taking more than $1.5 billion of our money and trying to spend it more wisely than we would spend it ourselves. I can imagine a wise technocrat taking $100,000 or perhaps even $1 million from American households and spending it more wisely than they would. But $1.5 billion? I do not believe that any human being knows so much that he or she can quickly and wisely allocate $1.5 billion.

--Arnold Kling, "The Stimulus and the Somme" 01-08-09

Absolutely no one can spend $1.5 billion of other people's money responsibly
--Donald Boudroux

Wednesday, January 21, 2009

A Peaceful Transfer of Power

I never watched an inauguration before, but I wanted to watch this one. So many mixed emotions!

I do find it exciting that a man with racial characteristics which 150 years ago would have made him a slave, and 50 years ago a second class citizen, has been accepted as leader of our country. However, I am saddened that race continues to be an issue at all and look forward to the day when it no longer gives us pause .

I am concerned about the anti-capitalist, pro-statism trend of popular American thought which brought to power a man with the political ideals of our new president. Yet, I see this as the culmination of understandable frustration with our current mixed economy, combined with the failure to recognize that it is not too much freedom that is the problem, but rather the interjection of political coercion into the private affairs of free men (under the rubric of central planning and special interest entitlements) which has wreaked such havoc with our economy and our lives.

I don't feel as though my beliefs and ideals have had a political champion for quite some time, and so I must continue to be my own champion. But, I remain ever-grateful that I live in a country that cherishes debate and protects freedom of speech so I can continue to work to persuade others of my ideas. I still feel a resonance with the people of this country: we want the best of all possible lives for ourselves, our children and people throughout the world--and we continue to strive side-by-side to achieve that goal, even when we disagree so strongly on the appropriate means of achievement.

I found the experience of watching President Bush smile and shake hands with President Obama a moment of worthy of awe and admiration for the process of peacefully transferring power. In a tradition which began with Thomas Jefferson's victory over John Adams, yesterday's transfer was much less revolutionary than the election of 1800, and will not result in civil war as did the election of 1860. I am proud to be part of a country that values and honors that peaceful process. And yet, I fear far too much power is increasingly being granted to the President, and to our government in general.

A number of friends called me yesterday to express concern over where President Obama will attempt to lead us. There is much to be concerned about. But let's not forget, there were significant problems in the leadership of President Bush, and Senator McCain would have created yet another set of challenges.

The events of the past several months have demonstrated how little understanding our politicians have of economics, or even for the essential connection between economic and political liberty. But our elected officials are the expression of the state of understanding of the electorate. To produce better politicians, we needed better informed citizens. That means thinking, educating ourselves, talking, blogging: identifying the essential points of agreement and disagreement and then making the best possible case we can for that in which we believe. Eternal vigilance sure is a lot of work--but it sure beats the alternatives!

Tuesday, January 20, 2009

From the Minnesota Federal Reserve

The recession in perspective

The economy is in recession. But how bad is it? How does this recession compare to previous recessions?

This page places the current economic downturn into historical (post-WWII) perspective. It compares output and employment changes during the present recession with the same data for the 10 previous recessions that have occurred since 1946.

This page provides a current assessment of “how bad" the recession is relative to past recessions. It will be updated as new data are released. This page does not provide forecasts, and the information should not be interpreted as such.

The following charts provide information about both the length and depth of recessions.

Tab 1

* Mildest, median, and harshest lines reflect the smallest, median, and largest declines as of each month; they do not reflect specific individual recessions.

Larger Image
View Data

1. Employment is nonfarm payroll employment calculated by the Bureau of Labor Statistics.
2. Postwar recessions include the 10 recessions as defined by the NBER that started between 1946 and 2006.

3. Open data table to see how the mildest, median and harshest lines are calculated, and for data on individual recessions.

Tab 1

* Mildest, median, and harshest lines reflect the smallest, median, and largest declines as of each quarter; they do not reflect specific individual recessions.

Larger Image
View Data

1. Output is gross domestic product adjusted for inflation as calculated by the Bureau of Economic Analysis.
2. Postwar recessions include the 10 recessions as defined by the NBER that started between 1946 and 2006.

3. Open data table to see how the mildest, median and harshest lines are calculated, and for data on individual recessions.

Post-WWII Recessions

The Business Cycle Dating Committee of the National Bureau of Economic Research determines the beginning and ending dates of U.S. recessions.

It has determined that the U.S. economy experienced 10 recessions from 1946 through 2006. The committee determined that the current recession began in December 2007.

Length of Recessions

The 10 previous postwar recessions have ranged in length from 6 months to 16 months, averaging about 10 1/2 months. The current recession has surely surpassed the postwar average, but its total length will only be known when the Business Cycle Dating Committee retrospectively determines the final month of the recession.

Depth of Recessions

The severity of a recession is determined in part by its length; perhaps even more important is the magnitude of the decline in economic activity. That is, how much do employment and output fall?


Clarification of the Data

An important comment by Alex Tabarrok on Marginal Revolution clarifies that:

The mildest, median and harshest recessions in the Fed's graph are Frankenstein recessions, recessions cobbled together by taking bits of pieces of each past recession and assembling them to create a mild, median, and harsh recession - none of which ever occurred.
He then provides another graph which tracks actual individual recessions:

He also provides the email in which the Fed justified their approach to him.

Given all the pressure for massive government intervention to spend and stimulate, it's important to keep it all in perspective.


Monday, January 19, 2009

Musings on Trillions

Just what is a trillion? It's a million million. That's 1012 or 1,000,000,000,000.

fr0m Trillion-Dollar Spree is Road to Ruin, Not Rally
by Kevin Hassett

The Congressional Budget Office last week forecasted that the 2009 federal budget deficit will be about $1.2 trillion, roughly triple what it was in 2008... If the stimulus bill passes, the deficit next year will be $1.7 trillion...

The whole world’s military spending in 2006 totaled a little less than $1.2 trillion. So next year’s U.S. deficit could cover that and still have $500 billion left over for building bridges...

When President George W. Bush was first elected, total federal government spending was about $1.7 trillion. In other words, the difference between federal outlays and federal revenue this year will be bigger than the entire government was as recently as 2000.

In last Sunday's Washington Post, Greg Ip gives a few more startling figures:

At the end of the last fiscal year, in September, the total public debt held by the American people (excluding debt issued to the Social Security Trust Fund or held by the Federal Reserve) stood at $5.8 trillion, or 41 percent of gross domestic product -- about what the debt-to-GDP ratio has averaged since 1956. But the Congressional Budget Office projects deficits of $1.9 trillion over the next two years. Add almost $800 billion of stimulus spending, and U.S. debt soars to 60 percent of GDP by 2010 -- the highest level since the early 1950s, when the nation was working off its World War II and Korean War debts.

The other major cause for concern is that the federal government has taken on massive "contingent liabilities" -- loans and guarantees that don't become actual costs until the borrower defaults and the federal guarantee has to be honored...Bianco Research, a Chicago financial research firm, puts the total of such contingent liabilities (as of Dec. 29) at more than $8 trillion.

According to Howie Rich 2008:Year of the Bailout, on 01/08/2009, the government may have committed itself to $10 trillion thus far :

And while there is some confusion as to the current price tag of this growing “Bailout Mania,” we know that over the past sixteen weeks the U.S. government has poured nearly $10 trillion dollars into “correcting” the market.

You heard that right - $10 trillion dollars.

What about the $2 trillion in FDIC assurances, $1.75 trillion in Federal Reserve commercial paper purchases, $900 billion in term auction facility lending, $600 billion to insure money market funds, $600 billion to cover Fannie and Freddie’s worthless mortgage-backed securities, $550 billion for discount Federal Reserve loans, $500 billion to insure FDIC deposits, $300 billion for FHA mortgage relief, $250 billion for Citigroup debt, $225 billion for securities loan facility lending, $200 billion for Fannie and Freddie’s debt, $112 billion for A.I.G., and on down the line.

Add all those numbers up and you’re dealing with more than twice the inflation-adjusted cost of rebuilding post-World War II Germany, the Louisiana Purchase, NASA’s entire budget (since its inception), the S&L bailouts, Roosevelt’s New Deal, the Korean War, the Vietnam War, the Gulf War, and the Iraq War – combined...

With only a fraction of the total bailout tab on the books, our national debt has already soared to more than $10.7 trillion dollars.

That’s an astounding 72.5 percent of our gross domestic product (GDP).

Eight years ago, the debt was $5.6 trillion, or 58 percent of our GDP.

Just where is all of this money coming from?

One explanation can be found on Smart Money: Fed's Balance Sheet is Ballooning Fast. Luskin correctly compares all this money creation to counterfeiting, but then he backs off and says it's needed to stave off deflation. Oh well, I still like his graph.

Another (better) explanation of what the Fed and Treasury have been up to these past few months is provided by Axel Merk in "Monetizing the Debt." He explains it better than I ever could so if you are interested, you will just have to read it for yourself. Anyone else come across a good explanation?

Update 1-23-09 An excellent set of posts on this topic can be found at The Rational Capitalist. He refers to a couple of posts at Econbrowser (and an update here) which go into the details of just how the Fed and the Treasury are attempting to create money now while delaying the inevitable inflation.


Sunday, January 18, 2009

It's still getting better!

Amidst all the bad news on our struggling economy, and with expectations of greater government interference with our economic freedom, it was refreshing to some across a little good news.

"The Good News From a Bad Year: Things are still getting better all the time" by Radley Balko.

Here's some of the points made in the article:

Crime rates are still falling. (Sex crimes are down, too.)

The divorce rate is at its lowest point in four decades.

Americans once again set a record for life expectancy. The same CDC report noted that mortality rates for eight of the 10 leading causes of death in America dropped in 2006.

Juvenile crime dropped.

Americans work on average eight fewer hours than we did in the 1960s. We're spending more money per person on recreation.

I found the reference to this article on the blog of Johan Norberg, author of In Defense of Global Capitalism. He apologized for not posting much recently as he is finishing up a book on the current economic crisis. (The deadline was 1/16/09 and his son has the chicken pox!) Though to be published in March, it unfortunately will be in Swedish. We'll have to wait a bit longer for the English version. I am looking forward to what he will have to say. As I posted on him before, he has an optimistic take on the state of the world and gives a lot of the credit to the steady increase in economic freedom.

Every once in awhile, it's good to remember that that in the long run, things really have been getting better.

Saturday, January 17, 2009


There is no limit to the Fed’s ability to create money, so there is no limit to its ability to create demand.

from "Why 'Stimulus' will not Work" by Louis R. Woodhill 01-16-09

Neither government nor the Fed create real demand. This is the fallacy that all those in favor of government intervention into the economy of any type do not get.

Monetary demand is not real demand.
That is the meaning of Say's Law of Markets. Real demand is not pieces of paper. Real demand is the actual wealth which pieces of paper may or may not represent. And government does not create wealth: it only seizes and redistributes it.

The government can print fiat-paper money, or the Fed can conjure up in multiple ways its electronic equivalent, but NONE of it is real wealth and therefore NONE of it is true demand. To "stimulate" real, sustainable, efficient growth in the economy, what is required is real demand, which means production. Since monetary demand is not real demand, it can only create the appearance of real, sustainable, efficient growth, which must eventually come crashing down, just as it did in the bust and the housing bubble bust, and multiple prior recessions. The larger the amount of artificial demand used to "jump start" the economy, the larger and more destructive the adjustment back to real demand will be. Artificial demand destroys savings, wastes resources, encourages excessive debt and risk-taking, and perhaps worst of all, undermines confidence in free-markets and freedom itself.

I try to keep in mind that most of the people who are advocating government bailouts, public work projects, stimulus packages and the like, honestly think they are doing the right thing. But when I think about the destruction these policies will cause, I can't help but get angry.

Friday, January 16, 2009

Money as Debt

(Please read post before viewing)

A few months ago, Glenn McIntosh sent me the link to the above video clip. I hesitated to embed it until I had a chance to review it more carefully--and I finally have. Some parts are excellent; some are equally disastrous. The first 20 minutes provide a clear and well illustrated explanation of how, currently, our money is based not on value but on debt. Accepting the legitimacy of a system where money is debt creates the foundation upon which are built many of the errors in mainstream economic thought. To understand how and why a free market works, to properly interpret Say's Law of Markets, to understand the fatal flaws of Keynesian economics, it is essential first to understand money- what we currently call "money" and what money more properly should be.

I received the link at the same time I was reading The Mystery of Banking by Murray Rothbard. The whole book is worth reading, but the first 100 pages in particular provide a helpful introduction to money, its history, its role in an economy, and the importance of understanding how the law of supply and demand function in regards to money itself. What I found particularly informative is the role of credit expansion (via fractional reserve banking) on the supply of money. I don't agree with Rothbard's assessment that the creation and use of fiduciary media is by nature fraudulent, but he explains quite well how money is created from "thin air" through the pyramiding of debt. This aspect of the "money supply" is essential to understand in order to comprehend today's events. (Even with rock-bottom interest rates and a skyrocketing monetary base, we are experiencing a deflation through the collapse of that credit pyramid.) The table of contents can direct your reading to specific subjects of interest, but I would strongly recommend reading at least the section on fractional reserve banking (pg. 94-103) to complement the first 2o minutes of the video clip.

The clip provides a quick introduction to some of the same ideas. The explanation and visual presentation of the structure of the system is accurate. The analysis of the cause (evil bankers and unsustainable growth) and the offered solutions (total government control of money and/or reversion to a barter economy based on the labor theory of value) are ridiculous. Also, the author fails to see the essential supporting role government has in the expansion of credit via legal tender laws and the Federal Reserve.

Some of the good points the clip makes:

1. "Money used to represent value. Now money represents debt."
2. A major problem with fiat paper money is that it allows government and banks to loan what doesn't exist. What does exist is real savings --the excess of production which is not immediately consumed and therefore available for investment in the production of goods in the future. Paper money allows the pretense that wealth is being transferred and invested, when in fact nothing is. Eventually reality has to catch up because you can't get something from nothing.
3. How the threat of bank runs provides an important check on credit expansion (and the unstated implication of the moral hazard provided by reserve requirements and federal deposit insurance.)
4. The government directly creates less than 5% of the money in circulation. The rest is created indirectly through bank credit.
5. Also implied is the mechanism for monetary contraction through a collapse of the credit pyramid when there is a decline in the value of the assets at the base of that pyramid.
6. "Inflation is a flat tax on money." Because it is not directly voted on, it is "taxation without representation." Inflation is a huge wealth redistribution program that takes wealth form savers and gives it to spenders. This is not an unintended consequence of Keynesian economics, but the intended consequence.

Some of the key errors in the latter half:

1. Charging interest is unethical in all cases.
2. Money is "just an idea" and can be "whatever we choose it to be." (See An Argument for Commodity Money)
3. Economic growth is unsustainable because it will deplete "finite resources." (See Finite Resources vs. Infinite Resourcefulness)
4. Equating inflation/deflation with rising/falling prices irrespective of cause. (see Inflation and Deflation)

Some of the ideas I need to consider further:

1. If money is debt, then "No debt, no money."
2. The driving force of the endless need to expand the money supply is the need to create enough new money to pay the interest on the debt.

Thanks to Glenn for the tip. I hope you find the clip informative as well.

Up date 1/16/09: Related to this topic is an excellent post at The Rational Capitalist on The History of Money and Banking. The post discusses the origins of fractional reserve banking, and the concepts of bailment, loan and deposit contracts. Some of the problems of fractional reserve banking are nicely illustrated through his example of bike stoarage and bike-claim tickets. I had intended to write a post along these lines sometime in the future, but now I don't have to. I love the dividsion of labor!!

Thursday, January 15, 2009

Something for Nothing

I came across this article yesterday. Saville doesn't really say anything which I haven't read in multiple places, but he says it very well and quite succinctly.

Trying to get Something for Nothing

by Steve Saville 10-21-2008

The current predicament was not caused by insufficient government regulation and the risk of future disruptions will not be mitigated by increased government regulation. The mortgage market was already heavily regulated prior to the crisis, but had it been even more regulated and had the regulations severely crimped, rather than boosted, the abilities and desires of financial corporations to expand the supply of mortgage-related instruments, then the focal point of the boom would have shifted; however, bubbles would still have formed somewhere and these bubbles would subsequently have burst, leaving financial wreckage and major economic dislocations in their wake (the bust is always and everywhere a consequence of the preceding boom)...

Now that the investment boom has gone bust and the necessary adjustment process has begun, we are being told incessantly that the solution to the problems caused by massive increases in the supplies of money and credit is additional massive increases in the supplies of money and credit. And given that the private banking industry is no longer capable of driving the monetary expansion, we are being told that the central bank and the government must become even more involved...

Whether the advocates of increased government spending and the various other re-inflation policies realise it or not, at the root of their proposed 'solutions' to the crisis is the idea that it is possible to get something for nothing. It is axiomatic that an increase in production must precede a sustained increase in consumption; that saving is the basis of long-term economic growth; that no individual can become rich by spending more than he earns; and that no country can become wealthy, or recover from a recession, by consuming more than it produces. And yet, most commentators have deluded themselves into believing that you can get around the problem of inadequate real savings by simply increasing the supply of the medium of exchange, and that you can bypass the need for increased consumption to be funded by increased production by simply getting the government to spend like a drunken sailor.

Sweet summary, isn't it? Truly, the whole article is worth a read.

Wednesday, January 14, 2009

Fair Weather Free-marketers

I was surprised by the recent article in Time by Jeffery Sachs, "The Case for Bigger Government." My introduction to Sachs was his being featured prominently in the PBS production The Commanding Heights (though only briefly mentioned in Yergin and Stanislaw's book of the same title.) He was portrayed both places as as a proponent of free markets, and was more recently severely attacked for being a free-marketer by Naomi Klein in Shock Doctrine.

Here's what was said about him in The Commanding Heights (book):

From the mid-1980's on, [Sachs] was at the center of economic reform in Latin America and since then in eastern Europe, the former Soviet Union, Asia and Africa. His experience in confronting the results of government control of the commanding heights proved profoundly disillusioning; he lost his confidence in the ability of governments to control their economies in a rational way. "The more that I have sat and discussed the economy with government ministers," he said, "the more I have come to believe in the anonymous, competitive processes of the market. And now I am attacked all over the world as a Friedmanite. Considering where I came from, that's amazing for me.

Where he came from was Harvard, steeped in Keynesian economics. (Part of the paradox of Keynesians is that they view themselves as the saviors of capitalism.) Looking into it further, I found that Sachs had subsequently abandoned his confidence in free markets as evidenced by his more recent work in developmental economics and "sustainability". He serves as yet another example of the effects of economic pragmatism so painfully illustrated by Bush and others who claim to support the free market, "except when it doesn't work."

During a boom, it's easy for even Keynesians to support the "free market," but upon the arrival of the inevitable bust, they'll cry out for relief via government interventionism. Naomi Klein accuses Milton Friedman and other supporters of capitalism of celebrating disasters as the means to thrust their agenda on the desperate and ignorant masses. As evidenced from all the Keynesians and leftists finding a renewed public platform for their statist agenda, if Klein wants to be consistent, she needs to include them in her accusations.

But I disagree with Klein that attempts to promote one's ideas in times of crisis is an act deserving of condemnation. It is precisely when things go wrong that we need to take a fresh look at things, reexamine our assumptions and attempt to deepen our understanding of the underlying principles. Friedman correctly identified this response to disasters and the importance of ideas in the search for solutions:

Only a crisis--actual or perceived--produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible become the politically inevitable.1

I think what we are seeing now is the result of the fact that economics is so poorly understood by the general public--and the understanding which does exist is an uncritical acceptance of the basics ideas of Keynes. This should be no surprise since authors like Samuelson and Norhaus, or McConnell and Brue (who espouse Keynesian principles without adequate presentation of the critiques offered by the Austrian school of economics) dominate the market for introductory economic texts. Without an understanding of basic economic principles and controversies, the intelligent citizen is significantly handicapped when trying to understand and analyze economic events, in times of crisis or otherwise. This ignorance leads to intellectual vulnerability.

Without the proper principles to serve as an anchor, the pendulum continues to swing --and the commanding heights2 remain up for grabs.

1. Friedman, Milton, Capitalism and Freedom, Chicago: University Press, 1982, ix
2. Explanation of the term "commanding heights" from The Commanding Heights, Daniel Yergin and Joseph Stanislaw, Touchstone, 1998: In a speech on Nov. 13, 1922 to the Fourth Congress of the Communist International, Lenin defended the inclusion of private property into his New Economic Plan by explaining the state would continue to control the " 'commanding heights,' the most important elements of the economy." This meant "government control of the strategic parts of the national economy, its major enterprises and industries." For the Soviet Union, this meant outright ownership. "In the United States, government exerted control over the commanding heights not through ownership but rather through economic regulation, giving rise to a special American brand of regulatory capitalism."

Tuesday, January 13, 2009

The American Form of Government.

In the comments, there's been a discussion as to whether capitalism is an economic system or a political system, or both. It is clear the two are integrally connected. Here's a clip explaining different types of political systems.
It's not perfect. (I question the accuracy of some of the references to ancient history.) But it does make some important points about democracy.

Monday, January 12, 2009

Inflation and Deflation

Inflation is frequently defined as “a rise in the general price level.” Deflation is defined as “a fall in the general price level.” These definitions are both erroneous and harmful. When an effect (a change in the level of prices) is mistaken for a cause (in this case, a cause of deflation or inflation) efforts to address the problem will be misdirected. Sometimes it leads to trying to fix what isn’t broken, and other times to taking actions which aggravate rather than relieve a real problem.

Inflation and deflation are "everywhere and always"1 monetary phenomena--by which I mean, they occur as a result of a change in the quantity of money. Inflation is the decline in the purchasing power of money due to an increase in the supply of money more rapid than the increase in real wealth.2 When the supply of money is kept constant, prices will reflect the existing relationship between supply and demand.3 The greater the supply, the less valuable something is. As economic value is expressed in terms of demand, this means the greater the supply the less the demand. The “equilibrium price” is that price at which all of the existing supply will be purchased (i.e. demanded.) Prices will fall if supply goes up relative to demand and will rise if demand goes up relative to supply. In a system of constant money, changes in prices reflect changes in the supply and demand of the various goods and services4 available for exchange.

Money itself is effected by the law of supply and demand. The greater the supply (the larger the quantity of money) the less valuable money is in terms of goods. In other words, it takes more money to purchase the same supply. Prices rise. The opposite is also true: a contraction in the money supply will lead to falling prices as the existence of less money makes each unit of money more valuable.

So, the quantity (supply) of money has definite effects on prices by its ability to change demand (the willingness and ability to spend money.) When more money is available, a larger amount of money can be offered to purchase the same goods as before. Prices are also affected by the availability of goods. An increased supply of goods will also result in lowering the equilibrium price. To the extent that the increase in supply is due to an increased productivity (increased efficiency in labor and/or materials) the fall in prices will not have an adverse effect on profitability, total sales revenues or ability to repay debts. Quite the opposite. An increase in the supply of goods due to increased productivity is the engine of economic progress and the cause of a rise in the standard of living. Less of one’s labor is needed to obtain the same or greater amount of goods. To equate falling prices due to an increased productivity with a fall in prices due to a contraction in the quantity of money is to equate a beneficial situation with a harmful one. For this reason, defining inflation and deflation simply in terms of a change in prices fails to distinguish between these fundamentally opposite economic situations.

Fear of falling prices, irrespective of the cause of the fall, has misled many economists. The siren of “price stability” has lured both Keynesians and Monetarists onto the rocks of inflationary destruction. In contrast to falling prices due to an increase in the supply of goods, falling prices due to a contraction in the money supply will lead to a fall in total sales revenue, profits and thus a fall in employment and the ability to repay debts-the meaningful definition of deflation. But a large contraction in the money supply can only occur in a system that first allows a large growth in the money supply. This increase or decrease of the money supply out of sync with the production of real wealth is the ultimate cause of the boom and bust of the business cycle. Inflation, an increase in the money supply, stimulates a boom. Deflation, a contraction in the money supply, results in the bust.

What kind of money is vulnerable to significant and recurrent inflation and deflation? Money that is disconnected from the production of actual wealth, ie. fiat money and fiduciary money created through credit expansion. A commodity money, such as gold, can increase in supply, but its increase is limited. This is illustrated by the chart below showing the historical growth of gold as a percent of the world gold stock.

World Gold Production as a Percentage of World Gold Stock 1800-2000

(Source: Salsman, 19955 Click on images to enlarge.)

Once gold is brought into existence, only a negligible amount is used up6. The rest remains in existence as a store of value. The stability in the stock of gold is in marked contrast to money created out of thin air, either by the Federal Reserve or through the pyramiding of debt made possible by a fractional reserve banking system undisciplined by commodity money. Fiat and debt money can go out of existence as easily as it was created. The chart below illustrates the historical instability of the fiat money supply compared to the supply of gold. (Money supply is in red; gold stock is in black.)

Total Gold Supply vs. Money Growth Supply Annual Rate of Change 1933-2008

(Source: Gold Fields Mineral Resources, Ltd; KITCO)

This can also be demonstrated by comparing the purchasing power of gold to that of the U.S. dollar.

Purchasing Power of Gold and of the Dollar 1792-1994 (1792= 1.00)

(Source: “Gold and Liberty” by Richard M. Salsman7)

Or perhaps more dramatically when superimposed as below:

Purchasing Power of Gold and the U.S.Dollar 1792-1994

(Source: “Gold and Liberty” Richard M Salsman.8)

Prices rise and fall.

Prices can change as a result of shifting supply relative to demand, thus redirecting resources to where the demand is greatest. Or, prices can change because of a change in the quantity of money, leading to the inefficiencies of inflation and deflation. When prices simultaneously reflect both a change in supply/demand and a change in the quantity of money, there is no way to distinguish how much of the change is due to which cause. In this way, a changing quantity of money masks and distorts the signals which are essential for the efficient allocation of resources. Without accurate price signals, savings are malinvested, excessive risk is assumed, consumption exceeds production. Eventually, reality catches up with the falsely inflated values. The deflationary realignment is painful and destructive. To preserve accurate price signals and prevent the inflation/deflation boom-bust cycle, we must have a money which is sound and constant. These are the benefits of a commodity money, like gold.

An essential function of definitions is to enable us to isolate and distinguish different phenomena one from the other in order to think about them more clearly and accurately. Definitions of inflation and deflation that fail to distinguish between the differing causes for a rise or fall in prices can not serve this function. In fact, they do the opposite. Inflation and deflation disrupt economic calculations and are therefore destructive to the creation of wealth. A fall in prices due to increased productivity is accompanied by a rise in the standard of living. Only when this distinction is understood can we hope to respond appropriately to changing economic circumstances.

1. This phrase is from a frequently quoted description of inflation in Monetary History of the United States 1867-1960 by Milton Friedman and Anna Schwartz.
2. An alternate definition is “an increase in the quantity of money at a rate more rapid than the increase in the supply of gold and silver.” Gold and silver simply stand in place as a direct unit of measure of the value of all other wealth—wealth being the material goods made by man; also land and natural resources in so far as man has made them usable and accessible. All definitions are derived from Capitalism: A Treatise on Economics by George Reisman.
3. Demand is defined as the willingness and ability to purchase and is quantified by dollars actually spent.
4. To simply the language, for the rest of the post I will use “goods” to signify both “goods and services.”
5. Salsman, Richard, “Gold and LibertyEcon Ed Bull v.XXXV no. 4 1995, p. 27
6. An insignificantly small amount (relative to total existing stock) of gold is actually consumed in medical other commercial uses. The rest remains easily retrievable.
7. Salsman, 1995 p. 128-9
8. Salsman, 1995 p. 31